The Shocking Truth About America’s Ethanol Law: It Doesn’t Matter (For Now)

by Dan Charles (New England Public Radio) ... If you oppose government interventions in the free market, as Cruz does, the RFS is an outrage. ...

This view of the RFS is widely shared across the political spectrum, including, for instance, the editorial board of The Washington Post. Groups hurt by high corn prices, including hog farmers and the fast food industry, are on record calling for the abolition or relaxation of the ethanol mandate. In fact, even ethanol’s backers, in their fierce defense of the RFS, appear to believe that it is essential for the survival of their industry.

But is that really true? It took ethanol-dissing Ted Cruz’s victory in ethanol-loving Iowa’s Republican presidential primary to finally persuade me to hit the phones and figure this out.

I found two experts who’ve examined this question in great detail: Paul Niznik, an analyst at Stratas Advisors, an energy consulting business in Houston, and Scott Irwin, an economist who teaches at the University of Illinois. And here’s their bottom line: If the law changed tomorrow and gasoline companies were free to ignore ethanol, they’d almost certainly keep right on blending ethanol into their fuel.

Got that? The ethanol mandate requires gasoline companies to do something that, at the moment, they’d do anyway.

But getting gasoline’s octane rating up to that standard costs money. It means more refining of the petroleum, or using high-octane compounds in your gasoline formula, such as — you guessed it — ethanol. So gasoline companies aren’t using ethanol for its energy — they’re buying it for its high octane rating.

There are other compounds that you can add to boost octane levels, but many, like alkylate or iso-octane, are generally more expensive than ethanol. Another additive that is widely used globally, called MTBE, has such a bad reputation for polluting the environment that many states have passed regulations that make it difficult to use.

“As of today, the alternative sources of octane are more expensive,” says Irwin, who just updated his calculations on demand for ethanol last week.

“The truth is,” Niznik continues, “the [petroleum] refining folks knew in their hearts that if the [ethanol mandate] went away for a while, ethanol use wouldn’t drop much. They were looking around at the octane replacements, and knew that those things were really expensive.” Niznik says removing ethanol also would have forced gasoline companies to disrupt their refinery operations.

If this is true, though, and the ethanol industry doesn’t really need the law that requires ethanol in gasoline, why does it defend that law so fiercely?

“Without the RFS, it’s a riskier world” for the ethanol industry, Irwin replies. The RFS was, in fact, necessary to get the ethanol industry off the ground, and even though gasoline companies profit from its octane-boosting qualities, the petroleum industry has always opposed the law. Ethanol companies “believe that they are in a political death match, and that the petroleum industry wants to kill ethanol,” Irwin ways.

According to Niznik, there may be some justification for that fear. “Refiners are looking strategically up the road,” he says. “They’re looking at forecasts of shrinking gasoline demand. They could say to themselves, ‘Why should I be giving 10 percent away? I want to sell product that’s mine!’ ”

Switching to petroleum-based octane boosters such as alkylate would not be easy, though. In the short term, Niznik says, it would be self-defeating. Oil companies are competing against each other to make cheap gas, and “the guy with ethanol is probably going to win.”

A few states require a 10 percent blend of ethanol. Others, like California, have air quality regulations that make it very difficult to replace ethanol. READ MORE